Krishna Kurup, Executive Vice President, Client Services

When it comes to supplier performance management, we’ve observed over the years that only a subset of organizations are equipped with the right set of enabling technologies to standardize and scale their efforts to get the best possible results. Even fewer procurement organizations have a master plan in place to put supplier performance at the front and center of their overall supplier management efforts—regardless of the availability of an underlying technology platform to support such overall programs. As a result, companies continually sell themselves short when it comes to realizing the types of returns—e.g., hard dollar cost savings from quality improvements, reduced supply risk, enhanced contract and regulatory compliance, etc.—that are possible from the right supplier performance management programs and overall governing philosophy.

Properly executed, supplier performance management is just as critical to procurement organizations as strategic sourcing or basic procurement automation. But what does it take to get results? We believe that there are five key tips that any company contemplating—or trying to get more from existing—investments in supplier performance management should seriously consider. These are:

Thinking beyond Microsoft Office when it comes to enabling technology
Using supplier performance management as a way to justify, accelerate and improve
other procurement initiatives
Thinking global, not locally, when it comes to supplier performance management efforts
Only applying the 80/20 rule after an initial analysis when it comes to performance management
Tying performance management into an overarching procurement strategy

Let’s investigate each of these in more detail.

Thinking beyond Microsoft Office when it comes to enabling technology

Even when companies have licensed some type of performance management capability—or leveraged an existing investment such as BI for data analysis—we often observe that Microsoft Office still becomes the lowest common denominator when it comes to reporting and sharing performance data. Unfortunately, this is seriously limiting. It’s not that we’re anti-Microsoft. Far from it, in fact. The problem is that Excel and other Microsoft applications do not scale across multiple users, systems, and sites. Try rolling up scorecard metrics from hundreds of users across dozens of sites and multiple divisions to observe and diagnose performance related issues and you’ll see what we mean. As a hypothetical case example, consider how a materials or IT manager might observe that on-time delivery metrics for an individual supplier have fallen off. But what this individual does not see in their own Excel-based analysis—or even a shared spreadsheet—is that other locations are seeing what appear to them to be either perfect or mixed performance levels. By looking at the shared information and digging deeper on the data, the manager could find out that the problem does not appear to be coming from the supplier, but rather a logistics provider whose performance has fallen off in certain geographies (explaining why performance levels from the same supplier are fine in other regions and not acceptable
in others).

Using supplier performance management as a way to justify, accelerate

and improve other procurement initiatives

On its own, there are many reasons to invest in supplier performance management. But why not leverage it as a means to drive other program successes as well? Take supplier diversity, for example. By focusing on supplier performance improvements through measuring, managing, and proactively taking action to develop and enhance the performance levels of your diversity supply base, you can create a business case for the reasons that doing business with minority, women-owned or small business suppliers is not only good for marketing and reporting, but good for lowering the overall total cost of doing business with that supplier as well. After all, initiatives like supplier diversity should not just be about meeting the numbers. They should be about fundamentally improving procurement, one supplier at a time. And supplier performance management is a great way to enhance the types of value that these other initiatives
can deliver.

Thinking global, not locally, when it comes to supplier performance management efforts

When it comes to managing your suppliers, the closer that your suppliers are to you—geographically, relationship-wise, and culturally—the lower the risk they typically present. In other words, a supplier headquartered ten miles from one of your facilities where a close relationship exists presents much less of a risk than a supplier located in China (who might even be a trading or export company rather than a direct supplier, as the case so often is). This is why when it comes to supplier performance management, it’s critical to think globally and not just locally. There is no sense in simply tracking the performance—and sharing scorecard information—with a supplier located around the block. Rather, the real benefits come from working with global suppliers with whom your organization is less likely to know well. That way, surprises become much less likely. Besides, such investments can pay off significantly when a performance management system delivers an early warning of a performance challenge, days or even weeks in advance of a serious, impending issue. This “performance radar” is essential when working with China or other regions separated by an ocean considering that the lead time for global suppliers is often weeks or even months (as it often is, in the case of low cost
country sourcing).

Only applying the 80/20 rule after an initial analysis when it comes to

supplier performance management

When it comes to managing the activities of a procurement group, most executives preach the merits of what is often called the 80/20 rule. The 80/20 rule, known as the Pareto principle to Six Sigma types, simply states, according to Wikipedia, that “for many events, 80% of the effects comes from 20% of the causes.” The translation for procurement is that focusing on only a handful of the right set of initiatives with a select group of suppliers will lead to returns disproportionate to the overall numbers at hand. Unfortunately, however, it’s virtually impossible to Pareto order which suppliers to focus on from performance management initiatives, at least before a supply-base wide monitoring and measurement system is in place. And that’s because it’s the insignificant many suppliers versus the significant few that are likely to cause an organization the most headaches. Consider how a supply disruption or a bankruptcy from a smaller supplier can be just as damaging to production or service delivery as the same “hit” from a larger, more strategic supplier. This is why it’s critical to put in place a system that initially looks at as many suppliers as feasibly—and as realistically—as possible rather than focusing performance monitoring efforts on just a subset of suppliers from the start. Only then is it possible to use the 80/20 rule to select and implement development initiatives within the broader, managed group (of which you have accurate and timely insight on).

Tying performance management into an overarching procurement strategy

(and technology platform)

All too often, supplier performance management efforts start-out—and stay—as quiet, second-tier initiatives carried out by a handful of frontline procurement managers. Obviously, there’s some benefit to this decentralized approach. But to truly achieve the best possible results from supplier performance management programs, it’s essential to wrap these efforts around the broader procurement strategy a company is deploying—and within the procurement technologies that a company chooses to deploy for analysis, sourcing, contracting and requisitioning activities. Imagine the power of being able to understand the past performance of a supplier throughout the procurement lifecycle. In the contracting phase, for example, if you have the knowledge of past performance-related issues, it becomes possible to create additional clauses which offer incentives—or disincentives—for future performance patterns. Perhaps this involves a threshold bonus or a holdback that is paid out when a supplier meets certain metrics. Or maybe it mandates that suppliers dedicate additional quality resources to your organization unless KPIs or other metrics pass a certain level.

Without question, even if companies ignore these five tips, they will achieve some types of returns from their supplier performance management initiatives. But in our opinion, supplier performance management should have a multiplier effect on overall procurement returns—rather than providing isolated, but nonetheless valuable, base hits. However, hitting a home run through the triad of cost savings, quality improvement and building better overall supplier relationships through proactively managing and developing a supply base is not easy. It requires a commitment to performance improvement and risk reduction that must run through an entire operating philosophy. So ask yourself: are you ready to make this commitment? We hope for the sake of your stakeholders and shareholders that you’ll consider the overall impact that such a performance pledge can bring to your business.